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A smart contract is a computer protocol designed to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow trusted transactions without third parties. These transactions are traceable and irreversible. Smart contracts were first coined by Nick
Szabo proposed it in 1994. Proponents of smart contracts claim that a variety of contract terms can be partially or fully self-executing, self-executing, or both, and that the purpose of smart contracts is to provide security that is superior to traditional contract law. Many investors want to know how this smart contract works? Let the editor of the currency circle introduce to you the operating mechanism of smart contracts.

 How does a smart contract work?

Simply put, a smart contract is a deterministic program that performs specific tasks when certain conditions are met. Therefore, smart contract systems usually follow "if...then..." conditional statements. Although the concept of "smart contract" is well known, it is neither a legal contract nor smart. They are just a piece of code running in a blockchain distributed system.

In the Ethereum network, smart contracts are responsible for executing and managing blockchain operations when users (addresses) interact with each other. Addresses outside of smart contracts are called "External Accounts (EOA)". Therefore, smart contracts are controlled by computer code, while external accounts (EOA) are controlled by users.

Ethereum smart contracts basically consist of contract code and two public keys. The first public key is provided by the contract creator, and the other public key is the contract itself and is used as a unique digital identifier for each smart contract.

All smart contract deployment occurs through blockchain transactions and is only activated when an external account (EOA) or other smart contract is called. However, smart contracts are generally triggered by an external account (EOA), that is, the user for the first time.

As programmable codes, smart contracts are highly customizable, designed in many ways, and provide a wide variety of services and solutions. As decentralized and self-executing programs, smart contracts increase transparency and reduce running costs. Depending on the implementation, smart contracts can also improve implementation efficiency and reduce cumbersome costs. Smart contracts are particularly useful when it comes to fund transfers or transactions between two or more parties.

In other words, smart contracts can be tailored for a wide range of use cases, including the creation of tokenized assets, voting systems, cryptocurrency wallets, decentralized exchanges, games, and mobile apps. Smart contracts can also be deployed with other blockchain solutions covering areas such as healthcare, charity, supply chain, governance and decentralized finance (DeFi).

 Development history of smart contracts

The concept of smart contracts was first proposed by Nick Szabo in 1994, but at that time there was no concept of distributed ledgers and execution by blockchain. Nick Szabo also invented Bit
Gold, who began experimenting with cryptography to create virtual currencies before the advent of Bitcoin.

It wasn't until 2008 that Bitcoin proposed the concept of distributed ledgers. Bitcoin's distributed ledger was a relatively simple smart contract application. When the payer proposed payment and entered the private key, the Bitcoin blockchain would automatically execute the payment procedure. However, Bitcoin's smart contract does not allow the use of this to add conditions to the smart contract and can only perform simple payment behaviors. Five years later, Ethereum proposed a more complete smart contract solution. As long as you pay Gas, you can let the blockchain help you run smart contracts. Currently, there are many blockchain platforms with smart contract capabilities but Ethereum is still the most commonly used smart contract blockchain.

The content above is the editor’s detailed answer to the question of how smart contracts operate. Smart contracts are automated agents that reside on the blockchain. They typically contain functions and data structures that ensure that transactions added to the blockchain ledger meet certain predefined conditions. In a typical business collaboration scenario, smart contracts can automate workflows by automatically initiating the following steps when certain predefined conditions occur. This quality significantly reduces the time associated with business collaboration and agreement processes by eliminating the involvement of third-party intermediaries. From a development perspective, smart contracts and ledgers form the main components of a blockchain system.